When you think about banks and borrowing money, many of us automatically picture a maze of financial jargon. Not understanding these terms when you need to borrow can really cost you. So, what does it all mean? 

What is APR? 

APR, or Annual Percentage Rate, represents the yearly cost of your loan as a percentage, including interest and standard fees. 

For example, let’s say you borrow $10,000 over 3 years to buy a car. With an APR of 5.5%, your annual interest rate and standard fees are rolled into this percentage. You’d then make 36 monthly payments of about $301, totaling $10,870.52. This means you’d repay the $10,000 you borrowed, plus $870.52 in interest and fees. 

Your payments remain the same each month because of the way interest is calculated. Early payments include more interest and less of the loan balance, while later payments include less interest and more of the balance. 

What is a Representative APR?

Looking at APRs can help you compare loans or credit cards on an even basis. When you see a “Representative APR,” it means that at least 51% of customers will receive that rate or lower—though not everyone in that group will get the exact same rate. 

It’s easy to assume the lowest advertised Representative APR will be your rate. However, when you apply, you’ll likely receive a personalized APR based on your financial situation. This could be the same as, higher, or lower than the Representative APR. 

When considering a loan, remember that you might not get the advertised Representative APR. Your actual offer could be higher or lower. 

What’s a Personal APR? 

When you apply for a loan, the APR you’re offered will typically be based on your credit history, financial circumstances, the amount you want to borrow, and the loan term. This results in a personal APR. 

It’s important to understand this before applying—especially if you’re comparing loans based on Representative APRs. While Representative APR is helpful for comparison, it doesn’t guarantee the rate you’ll receive. 

You may not know your personal rate until after you’ve applied, and just applying can affect your credit score, as lenders usually check your credit report before offering a loan. Once you take out a loan, the lender will also update your credit file. 

What’s the Difference Between APR and Interest Rates?

For mortgages, car loans, and other personal loans, it’s essential to know the difference between an APR and an interest rate. The interest rate is the basic cost of borrowing, while the APR includes additional fees involved in the lending process. 

However, for credit cards, APR and interest rate are often the same thing.